The Role of Financial Accounting

Aug 15, 2020 in Economics Essays

Toyota Company Economics Essay Sample

Accounting is a business language that supports the transfer of information necessary for managers, investors, and owners to evaluate the financial performance of the company. The stakeholders are interested in the activities because their functionality strongly affects the result. Consequently, the goal of accounting is to help the stakeholders to improve the business decisions through the provided financial information. The paper focuses on the core of the financial accounting, Generally Accepted Accounting Principles (GAAP), and the Financial Accounting Standards Board (FASB), which help the investors to make right decisions and regulate reporting effectively and accurately.

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Financial Accounting

The stakeholder will not make successful investments without the timely and accurate financial information and an accountant, who prepares all necessary data. The accountant should make sure that the stakeholders understand the essence of the financial information. Thus, he or she collaborates with the organizations and individuals to help them to use the financial data and solve their business problems (Way, n.d.). Consequently, the important part is the collection of necessary data using the accounting software. The next step is interpreting, analyzing, and communicating accurate information. Moreover, the crucial aspect is a clear presentation aimed at building effective collaboration with the people from the necessary business disciplines (Way, n.d.). Thus, accounting is the process of summarizing and measuring business activities, studying financial data, and communicating the results to support the effective management. In turn, financial accounting is responsible for the preparation of the financial statements of organization, including the statement of owners entity, income statement, balance sheet, and cash flows, which helps to evaluate the past performance of the company and its financial condition (Way, n.d.). The successful operation of the contemporary company is not possible without efficient financial accounting.

The external stakeholders cannot make the informed decision without effective financial accounting. For example, creditors need the information to determine the creditworthiness of the entity and financial health of the customer (Jackson & Sawyers, 2002). Tax authorities with the help of financial accounting determine the credibility of the tax return filed on behalf of the company. For investors, it is important to analyze the feasibility of investing in the company. Investors want to ensure that they can receive reasonable return before providing their financial resources (Jackson & Sawyers, 2002). The external stakeholders usually communicate accounting information including a financial statement that helps to make a sound financial decision. Creditors and investors provide the company with money and want to be sure that such action is reasonable. According to one of the most successful investors Warren Buffett, if an individual wants to make an effective investment, it is necessary to learn all possible accounting information. His companys investing $11,000 turned into $36 billion in 4 decades (Price, 1998). He owes such success to paying significant attention to the reports on financial accounting using the technique called the ratio analysis.

The adequate skills of the founder of the Dell Corporation also impress in terms of successful investment. The initial investment in 1984 amounted to $1,000 for the building of personal computers, and in 4 years, the company proposed the public 3,500,000 shares of stock for $9 per share (Dell, n.d.). In 1999, the value of each share reached 60,000%. Consequently, the investment of $1,000 in 1988 has become $600,000 by the end of 1999 (Dell, n.d.). Michael Dell also explained such fast success by the application of financial accounting and deep study of its specific aspects.

The Importance of Generally Accepted Accounting Principles and the Financial Accounting Standards Board

The preparation of financial statement requires the application of Generally Accepted Accounting Principles, which comprise the basic items of financial reporting that an independent agency, Financial Accounting Standards Board (FASB) issues. The stated mission of FASB is to establish and improve financial reporting and accounting standards to provide the investors with useful data. FASB is searching the ways of completing the mission through the facilitation of an open and independent process that lets broad stakeholder participation. In turn, GAAP is a merging of the authoritative standards and the accepted ways of reporting and recording accounting information (Investopedia Team, n.d.b.). GAAP positively affects the communication of financial information. Besides, GAAP covers such aspects as the classification of balance sheet items, revenue recognition, and outstanding share measurement. If the financial statement is not prepared in accordance with GAAP, investors should be cautious. Some companies can apply the non-GAAP and GAAP compliant measures preparing the report of the financial results. The GAAP regulations demand that the non-GAAP measures are determined in the financial statements and other public disclosures, such as press release (Investopedia Team, n.d.b.). The stakeholders need guarantees that financial statements are prepared in accordance with GAAP because of the need to receive accurate data in the report. Besides, they want to be able to compare the statements issued by one organization with those that were proposed by the other one in the same industry to choose the most effective one.

Most importantly, when some organizations in America follow GAAP, the organizations situated outside the U.S. keep a different set of accounting principles called International Financial Reporting Standards (IFRS) (Investopedia Team, n.d.b.). These standards are multinational and issued by the International Accounting Standards Board (IASB) that contains a number of aspects crucially different from those supported by GAAP (Investopedia Team, n.d.a.). For example, IFRS is stricter concerning the ways an individual can calculate the costs of the inventory. However, they are not going to dwell unnecessarily on such distinctions. Today, the primary priority of FASB is the integration of the U.S. GAAP with the IFRS that would allow the establishment of more translatable and transparent financial practices internationally (Investopedia Team, n.d.a.). In turn, FASB intends to address the difference in reporting between leases, financial instruments, revenue recognition, and insurance.

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To conclude, the study of financial accounting showed that it plays a crucial role in making an informed decision, in particular, by investors, which further is reflected in the efficient return like those that the Dell Corporation and Buffett receive. In addition, GAAP and FASB significantly contribute to the formation of an accurate reporting process. In turn, it helps investors to choose an appropriate company to invest money in and further receive a high profit. Thus, it crucial to combine GAAP and IFRS appropriately, which would make the international financial practicing transparent.

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